January-September 2005

• Revenue SEK 200 (186) million
• Operating income SEK 14 (29) million
• Operating margin 7.1 (15.4) percent
• Income after taxes SEK 12 (21) million
• Earnings per share SEK 0.86 (1.57)

July-September 2005

• Revenue SEK 65 (58) million
• Operating income SEK 6 (4) million
• Operating margin 8.4 (7.2) percent
• Income after taxes SEK 5 (3) million
• Earnings per share SEK 0.33 (0.27)

Significant events

• New financial targets: Orc Software should achieve an annual revenue growth of at least 15 percent and an annual operating margin of at least 15 percent in the medium term. The company is overcapitalized and the capital structure will be reviewed
• Agreement with OMX regarding development of a new front office product

Future outlook
There is a continued strong interest in Orc Software's products, not least within the areas of algorithmic trading and market access, areas where Orc Software holds a leading position. The recurring license revenues continued to increase in the third quarter, and the annual value of existing client contracts amounted to SEK 232 million at the beginning of the fourth quarter
2005, representing an increase of 24 percent since the beginning of the year. Excluding foreign exchange effects the increase was 16 percent.

The operating margin is expected to amount to at least 15 percent in the fourth quarter 2005. Orc Software's financial targets are to achieve an annual revenue growth of at least 15 percent and an annual operating margin of at least 15 percent in the medium term.

In view of the anticipated growth and Orc Software's revenue model with quarterly license fees paid in advance, the Board of Directors believes that the company is overcapitalized and the capital structure will therefore be reviewed.

Markets
Global trading volumes continue to increase. For example, several of the US derivatives exchanges have shown new record volumes during the period both in turnover and electronically traded volume, as well as individual contract volume. The high trading volumes drive the demand on trading systems.

For Orc Software, this resulted in the company entering into contracts with a large number of new customers, particularly in New York, Chicago, Hong Kong, and Sydney. The new customers in Hong Kong and Sydney wanted, among other things, to be able to trade on several of the region's exchanges. In Europe, a number of existing customers expanded their installations during the period. Orc Software also sees an increase in interest from Eastern Europe, and during the period Orc Software signed a contract for the first time with a Czech customer.

The company's alliance partner, Reuters, has also witnessed an increase in interest from existing customers, particularly with regard to trading over ROR (Reuters Order Routing) and Orc ExNet. Furthermore, Orc Software and Reuters have also started to cooperate in the Middle East in order to be able, among other things, to offer trading on the Dubai International Financial Exchange.

Significant events during the quarter

Final agreement between OMX and Orc Software for new front office product

At the end of September OMX Technology and Orc Software signed an agreement regarding the development of a new front office product for trading in equities and derivatives instruments. The new product is primarily designed for brokers and traders who use the exchanges' terminals and supplements both Orc Software's and OMX Technology's existing product offerings. Furthermore, Orc Software, via OMX Technology, will gain access to a global distribution channel for sales via the exchanges of both this and other Orc Software products.

The agreement has resulted in the transfer of 12 employees within OMX Technology to Orc Software as of October 1, 2005. For an initial period extending up to the end of 2006, OMX will be responsible for the cost of developing and commercializing the new product. After OMX has received coverage for the costs incurred during the initial period, the two parties will share the sales revenues.

The new product is planned to be launched in the beginning of 2006.

Product development
Development work in the third quarter was primarily focused on the new version of the Orc System that will be launched in the fourth quarter. The new version includes, among other things:

• Improved functionality to create, price, and trade combination contracts.
• Two new market connections: American Stock Exchange and Philadelphia Stock Exchange.
• Support for two new platforms: Linux and Solaris 10. The broader support of platforms enables customers to combine software and hardware platforms in the way that is best suited to their requirements regarding cost-effectiveness and performance. Orc Software already supports Solaris 8 and 9.

As of September 30, 2005 Orc Software offers access to:

• 93 market places for companies with exchange membership
• 49 market places for companies without exchange membership

Share repurchase
Orc Software did not repurchase any Orc shares in the third quarter 2005. In total Orc Software has acquired 513 500 Orc shares for SEK 30 million, in accordance with the authorization provided by the Annual General Meetings in 2003 and 2004. Repurchased shares equal 3.5 percent of the total number of outstanding shares of 14 850 000. Excluding Orc Software's holding, the number of shares is 14 336 500.

Events after the end of the period

Orc ExNet has become a fully owned subsidiary of Orc Software

As of October 1, 2005 Orc Software has acquired the remaining 28 percent of the subsidiary Orc ExNet. The purpose of the acquisition is to achieve a more effective company structure and to allow for a closer integration with operations in general.

January-September 2005
The Group's revenue increased during January-September 2005 by 8 percent to SEK 200 (186 in the corresponding period 2004) million. The effects of the adoption of IFRS resulted in positive foreign exchange differences of SEK 15 million during the period, which is accounted for under Other operating revenue.

Systems revenue decreased by 1 percent to SEK 169 (171) million, and amounted to 85 (92) percent of total revenue. Systems revenue was mainly unchanged despite the changed revenue model for Orc Liquidator.

Other operating revenue amounted to SEK 30 (14) million.

At the end of September 2005 the number of client sites amounted to 2052, of which 187 (165) consisted of Orc Software's client sites and 18 were client sites through the Reuters alliance. Average revenue per client site during January-September 2005 amounted to SEK 1.2 (1.4) million. Of Orc Software's client sites, 17 new client sites were added during the quarter and the number of lost client sites amounted to 8. During the third quarter Orc Software received cancellations regarding 6 client sites.

July-September 2005
During July-September 2005 the Group's revenue increased by 12 percent to SEK 65 (58) million. The effects of the adoption of IFRS resulted in positive foreign exchange differences of SEK 5.0 million during the third quarter. Compared to the previous quarter, revenue decreased by 3 percent as a consequence of lower Other operating revenue.

Sales to North America, Asia and Australia increased compared with the previous quarter. Sales in Europe declined, primarily due to a cancellation by one of Orc Software's largest customers, as previously reported.

Systems revenue increased by 6 percent to SEK 56 (53) million. In relation to the previous quarter, systems revenue was mainly unchanged.

Other operating revenue amounted to SEK 9.4 (4.2) million, representing an increase of SEK 5.2 million. The increase is mainly related to positive foreign exchange differences. Compared to the previous quarter, Other operating revenue decreased by 16 percent due to lower revenue from professional services and decreased positive foreign exchange effects. Furthermore, these revenues included hardware sales.

Earnings
January-September 2005
Operating income decreased during January-September by 52 percent to SEK 14 (29) million, representing an operating margin of 7.1 (15.4) percent.

Foreign exchange hedging resulted in an effect on operating income of SEK -4.7 (9.9) million.

As of September 30, 2005, future flows equivalent to SEK 56 (31) million had been hedged, consisting of USD 5.0 (3.0) million and EUR 2.0 (1.0) million. The currencies are secured against Swedish kronor at an average forward rate of 7.43 (7.46) USD/SEK and 9.24 (9.11) EUR/SEK with a total average remaining duration of around 6 months.

July-September 2005
Operating income increased during July-September 2005 by 34 percent to SEK 5.5 (4.1) million, representing an operating margin of 8.4 (7.2) percent. Compared to the previous quarter, Operating income increased by SEK 4.5 million.

Operating expenses
Operating expenses increased during January-September 2005 by 18 percent to SEK 185 (157) million. In comparison to the previous quarter, Operating expenses decreased by 10 percent.

Personnel costs increased by 18 percent to SEK 98 (83) million during January-September 2005. In relation to the previous quarter, personnel costs decreased by 17 percent and amounted to SEK 30 million. This was a consequence of the previously reported efficiency program, as well as a certain positive effect of the reduced vacation pay liability. The introduction of a retirement pension plan in Sweden and the fact that E2E infotech was consolidated for a full quarter, had a certain effect on personnel costs.

The purchase cost of goods sold increased by 37 percent during January September 2005 and amounted to SEK 12.2 (8.9) million. Compared to the previous quarter, the cost decreased by 28 percent, primarily due to the consolidation of E2E infotech.

Other external expenses increased by 58 percent to SEK 41 (26) million during January-September 2005. The effects of the adoption of IFRS resulted in negative foreign exchange differences of SEK 10 million. Other cost increases pertain to costs related to the restructuring of a Liquidator agreement, as previously reported. Compared to the previous quarter, Other external expenses were unchanged. During the third quarter 2005 the negative foreign exchange differences amounted to SEK 5.4 million.

Depreciation and amortization decreased by 8 percent and amounted to SEK 12 (13) million during January-September 2005. Compared to the previous quarter the cost decreased somewhat.

Capitalized development expenditure
Capitalized development expenditure during January-September 2005 amounted to SEK – (0.7) million. The capitalized development expenditure decreased since the development of new market connections is no longer considered to meet the requirements for capitalization. Amortization of the accumulated capitalized development expenditure amounted to SEK 6.1 (6.7) million during January-September 2005.

Cash flow and investments
The Group's cash flow before changes in working capital and investments was SEK 31 (24) million in January-September 2005.

The change in working capital amounted to SEK -12 (3.1) million in January September 2005 and was primarily due to increased operating assets. Operating capital amounted to SEK -14 (3.0) million at the end of September 2005.

The Group's investments amounted to SEK -19 (22) million during January- September due to the repayment of the loan, equaling SEK 23 million, from Hun Research. Other investments, equaling SEK 3.9 million, mainly consisted of investments in computer and office equipment.

The company did not have any interest-bearing liabilities during the period. Liquid funds amounted to SEK 206 (190) million as of September 30, 2005.

Taxation
The tax rate during January-September 2005 amounted to 34 (34) percent. Tax expenses are calculated after estimated tax for parent company and respective subsidiaries. The relatively high tax rate is due to an unaccounted tax receivable, related to a loss carried forward in a subsidiary.

Employees
At the end of September 2005 Orc Software had 194 (165) employees. During the third quarter the number of employees increased by 11, primarily due to an increased number of developers within the subsidiary E2E infotech. The average number of employees during January-September was 180 (153).

Nominating committee
In accordance with the authorization from the Annual General Meeting in April of 2005, Orc Software's Chairman Magnus Böcker has summoned a nominating committee. The nominating committee consists of Magnus Bakke (Robur), Magnus Böcker (OMX), Fredrik Crafoord (H&Q), Björn Lind (SEB), and Olof Neiglick (Nordea). The nominating committee is responsible for issuing a proposal regarding the members of Orc Software's Board of Directors, Directors' compensation, the Chairman of the Annual General Meeting, appointment of auditor, and auditor compensation. Should the circle of the largest shareholders change during the nomination process, the composition of the nominating committee shall be modified accordingly to reflect such change.

Transactions with affiliated companies
During January-September 2005 the subsidiary Promyzer leased a server room from OMX Technology at a cost of SEK 284 thousand.

Cancale Förvaltning is part owner of Russian Real Estate Investment Company AB, which in turn owns the building where Orc Software's office in St Petersburg is located since December 2004. Cancale Förvaltning is owned by Ulrika Hagdahl, who is a Board member of Orc Software, and Nils Nilsson. The annual cost for the lease agreement currently amounts to SEK 877 thousand.

All transactions with affiliated companies are carried out according to market value.

The Parent company
The Parent company's revenue increased by 5 percent to SEK 187 (178) million. Income after financial items amounted to SEK 18 (31) million. Liquid funds amounted at the end of the period to SEK 166 (163) million, of which SEK 139 (119) million consisted of short-term investments.Download the document now 187.1 kb (Adobe Acrobat Document)